Context:
IIFL Finance, a Mumbai-based NBFC, has filed a petition in the Bombay High Court against Assets Care and Reconstruction Enterprise (ACRE), backed by Ares Management. The legal battle centers around alleged mismanagement of ₹1,085 crore in distressed assets under a 2021–22 servicer agreement
Key Allegations by IIFL Finance
- Arbitrary suspension and termination of recovery efforts by ACRE, hampering progress on asset resolution
- Unjustified charging of management fees after RBI’s October 2022 circular prohibiting such payments from non-recovery funds
- Violation of RBI guidelines by not refunding excess fees already paid
- Misuse of trust funds to cover ACRE’s legal expenses in arbitration, in breach of contract terms
- ACRE allegedly prioritized its own interests after recovering capital, compromising its fiduciary responsibility
Servicer Agreement Details
- Agreement covered:
- ₹1,085 crore in bad loans from 7 stressed developers and over 22,000 retail borrowers
- ACRE was entitled to:
- 4% annual management fee (~₹40 crore)
- Additional performance incentives based on recovery outcomes
Regulatory Trigger
- In October 2022, the RBI issued a circular requiring that management fees for ARCs be paid only from actual recoveries
- IIFL stopped fee payments post-circular and demanded refund of any excess payments made in violation of this directive
ACRE’s Response
- Refused to comment citing sub judice status of the case
- Rejected the accusations as baseless and misconceived
- Reiterated commitment to RBI compliance and stakeholder interest
Implications for the ARC Sector
- Case may set precedent for how servicer agreements are enforced post-RBI guidelines
- May lead to tighter fiduciary accountability standards for Asset Reconstruction Companies (ARCs)
- Could impact ARC fee structures, recovery timelines, and trust-based fund usage in future asset resolution deals
